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Specifics of Member's Withdrawal from a Limited Liability Company
24 November 2020
Partner
Corporate Practice
Litigation & Arbitration. Bankruptcy
Litigation & Arbitration. Bankruptcy
Partner
Corporate Practice
Litigation & Arbitration. Bankruptcy
Litigation & Arbitration. Bankruptcy
Question at hand: A limited liability company has four founders; the company has been lying idle for a long time. Three out of four founders are ready to sell/give away their membership interest or withdraw from the company. However, the fourth founder does not show any interest and does not give feedback. The company's Articles of Association state that a founder may withdraw from the company without the consent of the other founders. Can the three founders withdraw and leave the LLC to the fourth one? Among those who want to leave, there is also the CEO and the company's registered address is the address of his apartment – what is the specifics of withdrawal from the LLC for this member?
Our clients often come up with such questions. Everything starts well, but later, if the business does not work out, each member wants to leave the company in order to quickly throw off the burden of potential debts and current expenses.
There are several ways how members can withdraw from a limited liability company unless, of course, the company's Articles of Association contain express limitations to that. They include purchase and sale of membership interest, gift of membership interest and withdrawal from the company. A member's interest may also be collected by a third party for the member's debts.
Withdrawal of members from the company is mainly regulated by Article 26 of the Federal Law On Limited Liability Companies. Any member of the company has the right to withdraw from the company by the alienation of its membership interest to the company irrespective of the consent of the other members of the company or the company itself if this is provided for by the company's Articles of Association. A member's application to withdraw from the company should be notarized in accordance with the rules provided for by the laws on notarization of deals and transactions. The application should be filed by the notary themselves as part of their certification of the mentioned application. To certify the application for withdrawal, the notary will need the company's Articles of Association which the members can obtain either from the director or the territorial tax authority.
If a member of the company withdraws from the company, its membership interest will be transferred to the company. In this case, the company will be obliged to pay the member, who has withdrawn from the company, an actual value of his/her interest in the authorised capital of the company which is determined on the basis of the company's financial statements for the last reporting period preceding the date when the membership interest of the withdrawn member has been transferred to the company, or with the consent of this company's member to pay him/her in kind of the same value, or if such member has not paid his/her interest in the company's authorised capital in full, to pay him/her an actual value of the paid membership interest.
Therefore, three members desiring to withdraw from the company may visit a notary and make a corresponding application. Tax authorities will register withdrawal of the members within five business days upon submission of the application.
Withdrawal of the members of the company as a result of which there is no member left in the company, as well as withdrawal of the sole member of the company is not allowed, so the last remaining member cannot withdraw from the company until anyone else joins it.
The problem of the situation at hand is the status of the member who is the CEO (the sole executive body) and whose registered address is the registered address of the company. Before leaving the company, it is advisable to settle the issues with the address and the position of the CEO because, without the relevant registration procedures, both the CEO and the address will remain unchanged in the Unified State Register of Legal Entities (USRLE) and therefore, the CEO will continue to bear responsibility. Even a resignation letter will not help in this case since the information about the Company's head will remain the same in the URSLE and he/she will continue to be listed as a senior official of the company for third parties. The issue of the address, in turn, is relevant not so much for the member as for the company, since it will not be able to receive official mail, which is quite risky.
If it is not possible to find a candidate to replace the CEO, and the remaining member of the Company is not ready to assume the mentioned responsibility and resolve this issue in principle, then the safest option for the member being the CEO is to liquidate the company by the decision of the majority of members. If this procedure is implemented, a liquidator will be appointed instead of the CEO who will perform all the necessary actions to exclude the company from the register.
I must say that in a similar situation, many participants simply "abandon" their companies and stop submitting even zero statements. But even this practice often works because, in the absence of serious debts, the tax authorities themselves liquidate companies as part of the register "cleaning" procedure. In this regard, I can give you the following illustrative example. Territorial Federal Tax Service Inspectorates annually send "letters of happiness" to check whether the registered addresses are real. If no response is received to such a letter, they begin the procedure of exclusion the company from the register within three months. We have encountered with such cases with active and operating companies. So, draw your own conclusions.
Our clients often come up with such questions. Everything starts well, but later, if the business does not work out, each member wants to leave the company in order to quickly throw off the burden of potential debts and current expenses.
There are several ways how members can withdraw from a limited liability company unless, of course, the company's Articles of Association contain express limitations to that. They include purchase and sale of membership interest, gift of membership interest and withdrawal from the company. A member's interest may also be collected by a third party for the member's debts.
Withdrawal of members from the company is mainly regulated by Article 26 of the Federal Law On Limited Liability Companies. Any member of the company has the right to withdraw from the company by the alienation of its membership interest to the company irrespective of the consent of the other members of the company or the company itself if this is provided for by the company's Articles of Association. A member's application to withdraw from the company should be notarized in accordance with the rules provided for by the laws on notarization of deals and transactions. The application should be filed by the notary themselves as part of their certification of the mentioned application. To certify the application for withdrawal, the notary will need the company's Articles of Association which the members can obtain either from the director or the territorial tax authority.
If a member of the company withdraws from the company, its membership interest will be transferred to the company. In this case, the company will be obliged to pay the member, who has withdrawn from the company, an actual value of his/her interest in the authorised capital of the company which is determined on the basis of the company's financial statements for the last reporting period preceding the date when the membership interest of the withdrawn member has been transferred to the company, or with the consent of this company's member to pay him/her in kind of the same value, or if such member has not paid his/her interest in the company's authorised capital in full, to pay him/her an actual value of the paid membership interest.
Therefore, three members desiring to withdraw from the company may visit a notary and make a corresponding application. Tax authorities will register withdrawal of the members within five business days upon submission of the application.
Withdrawal of the members of the company as a result of which there is no member left in the company, as well as withdrawal of the sole member of the company is not allowed, so the last remaining member cannot withdraw from the company until anyone else joins it.
The problem of the situation at hand is the status of the member who is the CEO (the sole executive body) and whose registered address is the registered address of the company. Before leaving the company, it is advisable to settle the issues with the address and the position of the CEO because, without the relevant registration procedures, both the CEO and the address will remain unchanged in the Unified State Register of Legal Entities (USRLE) and therefore, the CEO will continue to bear responsibility. Even a resignation letter will not help in this case since the information about the Company's head will remain the same in the URSLE and he/she will continue to be listed as a senior official of the company for third parties. The issue of the address, in turn, is relevant not so much for the member as for the company, since it will not be able to receive official mail, which is quite risky.
If it is not possible to find a candidate to replace the CEO, and the remaining member of the Company is not ready to assume the mentioned responsibility and resolve this issue in principle, then the safest option for the member being the CEO is to liquidate the company by the decision of the majority of members. If this procedure is implemented, a liquidator will be appointed instead of the CEO who will perform all the necessary actions to exclude the company from the register.
I must say that in a similar situation, many participants simply "abandon" their companies and stop submitting even zero statements. But even this practice often works because, in the absence of serious debts, the tax authorities themselves liquidate companies as part of the register "cleaning" procedure. In this regard, I can give you the following illustrative example. Territorial Federal Tax Service Inspectorates annually send "letters of happiness" to check whether the registered addresses are real. If no response is received to such a letter, they begin the procedure of exclusion the company from the register within three months. We have encountered with such cases with active and operating companies. So, draw your own conclusions.
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